Australia’s performance is remarkable when you consider the swings that the global economy and Australia’s trading partners have been through over the past 24 years.

But London-based Longview Economics asks if Australia is “structurally different from other economies such that it can achieve longer lasting phases of growth without any meaningful repercussions? Or, given the record length of this expansion, does a recession beckon?”

Bubbles are particularly extreme in Shenzhen, and in technology: the median tech stock traded in the city is priced at 65 times forward earnings (the median Nasdaq tech stock is at 19 times). There are exceptions. Banks, which make up more of the Shanghai market, are still priced for bad news. Still, Longview Economics calculates that large state-owned enterprises have performed very similarly to large completely private companies in the CSI 300 index over the past year.

Chinese stocks are plainly overvalued. Exclude state-owned groups and banks, and everything is else is expensive. Longview Economics points out that 20 of 24 sectors trade at an earnings multiple of more than 30. Ecstrat shows that private non-financials trade at a dizzying book multiple of 5.2 (state-owned stocks trade at 2.3). Over the long-term a broad investment in Chinese equities is unlikely to work out.

Profits for US companies are expected to decline over two consecutive quarters for the first time in six years as analysts predict lower energy prices and a stronger dollar will weigh heavily on earnings in the coming months. Not since the aftermath of the financial crisis have S&P 500 companies recorded two straight quarters of falling profits on a year-over-year basis. The sharp reduction in profit estimates by Wall Street analysts comes six years after the S&P embarked on a bull run, resulting in a rally of 250 per cent, including the reinvestment of dividends...

Chris Watling, Chief Market Strategist at LongView Economics, said: “Since the early nineties, the only times that earnings per share have fallen in the US have been at the onset of recessions, in 2000 to 2002 and 2007 to 2009.”

Get your economic calls right and the sectors tend to select themselves, says Chris Watling of Longview Economics, a consultancy. The big themes in recent years have been the financial crisis and the subsequent sluggish performance of first developed, and then developing, economies. That has favoured those sectors which are more defensive in nature. People will always be sick, so health care companies will always have a market (the introduction of Obamacare seems to have been no problem for the sector). The same can be said for consumer staples (a group that includes packaged foods, soft drink manufacturers and, er, tobacco). These two sectors have been the best performers since the start of 2007.

Analysts debate last week’s big move in equities and decide whether this is the end of the bull market or a good opportunity to buy into it.

Medium-term buying opportunity
“The case for a major local low in equity markets grows ever more convincing and should be expected over the next few trading sessions,” according to Chris Watling (pictured above) and Scott Gray of Longview Economics. It will be a “compelling medium-term buying opportunity.”

Years without any 5 per cent S&P correction are rare. According to Chris Watling of Longview Economics, 1995 is the only one since 1970. With several indicators showing growing optimism among investors – which implies the risk of a sell-off – he suggests a pullback of between 5 per cent and 20 per cent in the next few weeks.

It would be good if this were right. I have argued before that an earlier correction in asset prices would be healthier than a continued rally and a later comeuppance. But I fear the bears may yet be right that the rally goes further.

Dotcoms and biotechs have again done well, in spite of a painful correction, but the valuation levitation has been spread across everything. The price of all US sectors is up, with nine of the 10 rising more than a tenth.

This shows up in the gap between the normal measure of forward PE and the median, the valuation of the stock in the middle of the range. This gap is back close to its highs of the past 20 years, thanks to the broad-based rise, according to Longview Economics.

The Bank of England needs to start normalising interest rates now in anticipation of these inflationary pressures. Chris Watling of Longview Economics has done the homework on this, and finds that in the last two tightening cycles, the cumulative rise in interest rates was between 2.3 and 2.4 percentage points.

If this was repeated this time around, it would raise Bank Rate to around 3 per cent over the next two to three years – high compared to today, but still low by historic standards. For some with big mortgages, this might prove too much, but for the great bulk of households it would be manageable, assuming a degree of real wage growth in the meantime.

Copper prices have slid by around 10% this year to $6,700 a tonne. Since 2011, as Longview Economics points out, a structural bear market has been underway, with prices down 32%, and the outlook remains negative.

Chinese demand growth edged down last year and this trend should endure. Half of China’s copper demand stems from the construction and infrastructure sectors, and a slowdown in real-estate construction is underway.

Inventories of unsold properties are at a 12-year high and prices and transaction volumes are heading south, foreshadowing fewer housing starts and hence lower copper demand.

The Bank of England needs to start normalising interest rates now in anticipation of these inflationary pressures. Chris Watling of Longview Economics has done the homework on this, and finds that in the last two tightening cycles, the cumulative rise in interest rates was between 2.3 and 2.4 percentage points.

In its April newsletter Longview Economics show that world private sector non-financial debt has increased from about 126 per cent of GDP in 1970 to more than 250 per cent of GDP in early 2014. That is unprecedented. Mr Gross's musings are relevant because the Fed funds rate, like the OCR in NZ, helps to price bonds, property and shares and just about everything else. In the US the futures markets anticipate a 4.0 per cent Fed funds rate in 2020 but if the neutral policy rate was only 2.0 per cent then bonds instead of being overpriced would be cheap. That has implications for NZ investors

Equity market calm might actually be a worrying sign. Low equity volatility – as measured by the CBOE’s Vix, known as the Wall Street “fear gauge” – as well as falling US, German and UK bond yields, point to a high level of complacency among equity investors, argues Chris Watling, chief market strategist at Longview Economics. “In sell-offs and waves of risk aversion, the most crowded trades are often the first parts of the financial market to start to deteriorate,’’ he warns.

Failing these things, it could be left to the Fed itself to do the job by raising rates or removing stimulus faster than the market had expected.

Chris Watling of Longview Economics in London says US equity valuations are undoubtedly “full” – but are no more expensive than when Alan Greenspan, then Fed chairman, tried to talk down the stock market by warning of “irrational exuberance” in December 1996. On that occasion the bull market carried on for three more years and turned into an epic bubble before finally going into reverse.

“They’ll become more expensive,” says Mr Watling. “It’s not until we see tight money that we talk about the end of this valuation uplift in the US.”

The ready availability of cheap credit also delays the natural cycle of corporate bankruptcies, which results in a more efficient use of resources across the economy.

“QE has pushed up asset prices and enhanced income inequality, that’s a structural weakness for the economy,” says Chris Watling, chief market strategist at Longview Economics. “QE has also held back the long-term health of the economy as we have not seen the normal pattern of business deaths that is part of the creative destruction process.”

While emergency near-zero interest rates and the first round of QE stabilised markets and the economy in 2009, the missing ingredient of a robust recovery has been the reticence of companies to boost their capital spending.

Chris Watling of Longview Economics has crunched the numbers. Total US non-financial debt, which was 180% of GDP as recently as 2000, is around 250% (and may be edging up). Eurozone non-financial domestic debt is approaching the same level; the UK numbers are more than 280%, Japan is over 370%. All are well above their pre-crisis levels

So without wanting to spoil the party, let's just put on record that two economists that I admire are sounding notes of caution. Chris Watling of Longview Economics thinks there is a high risk of some sort of pull-back, while Simon Ward at Henderson asks: "Should equity investors take profits?"

Longview Economics focuses on equities and asks: how long will the Western secular bull market last? Its answer, to give away the punchline, is about two years. It makes its own calculation on what is fair value for shares and plots to what extent shares have been above or below fair value. You can see in the bottom graph the result, with bands shown at one standard deviation and two standard deviations above and below it. As you can see, this indicator has been signalling a "buy" since August last year and remains in buy territory.

Have we fallen off the cycle or is the bike broken?
Since 1998, commodities have been in a bull market—the so-called supercycle, where surging demand for raw materials eclipses supply, juicing prices to abnormal highs.

At any rate, Chris Watling's view is that positive news from the US and the prospect of a return to growth in Europe in the second half of this year should underpin equities for a couple of months more, a view supported by one of the oldest of market adages, the first part of which is that one should "sell in May and go away

ALTHOUGH the yen has captured most of the currency headlines since the start of the year, sterling has been almost as weak. It started the year worth Y141 and is now around Y143. Against the dollar, the pound has weakened from $1.62 to $1.53; against the euro, the drop has been from €1.23 to €1.145, a 6.9% decline. It doesn't sound much but remember that the pound was only allowed to fall 6% from its peg to the D-Mark under the old Exchange Rate Mechanism.

Some intuitive suspicion of grand theories of history is in order, of course. But the fit with recent history is very plausible, and the ramifications go beyond commodity investors. Research by Chris Watling of Longview Economics showed that throughout the 20th century, stocks were horizontal when commodities were in their “up” cycle and made all their gains when commodities were quiet. The surge in materials prices during the past decade coincides with a “lost decade” for stocks.

Those are the arguments, and the conclusion of Chris Watling at Longview Economics, who pulled together this data, is that assuming the US manages to sort out its fiscal situation and the eurozone gets through its current troubles (two big "ifs") global shares are indeed a good buy. But there is a solid view, articulated for example by Andrew Smithers of Smithers & Co, who believes that US shares in particular are significantly overpriced when compared with their long-term performance.

Past commodity supercycles have lasted from 12 to 30 years, according to Longview Economics. If this one is ending, it will be the shortest so far. But if it is, prepare for much bigger falls to come...

IS IT good news or bad news? Commodity prices have been falling sharply in recent weeks—the S&P GSCI index dropped by 13% in May alone, the biggest monthly decline in two years. That amounts to a tax cut for Western consumers but it may also be a worrying sign that global growth is decelerating.